Category Archives: On the cover

On the cover

Brexit as an Opportunity (IM Magazine)

Global Economy, On the cover, Sin categoría

Article published at IM Magazine (here).

Now that article 50 has been triggered, there is a lot of speculation about the disasters looming over Britain. However, many experts believe that besides the challenges ahead there are many opportunities to exploit. Daniel Lacalle, Commissioner of the Madrid Region in London explores the path that lies ahead of Britain in the post-EU era and how European regions like Madrid could benefit from it.

Brexit, the process of disconnecting the United Kingdom from the European Union, has been launched. The first thing we must be is intellectually honest and recognize that the estimates of an economic debacle post-referendum have not happened, but the challenges are relevant. Most economic indicators in the EU and UK have been strengthening. Growth and employment generation in the UK have been revised upward by the Bank of England, and investment banks estimate a similar improvement in Europe.

The UK economy continues to grow with a 20bps increase over post-referendum estimates, bringing GDP growth for 2017 to 1.6%. In addition to the recent revaluation of the Pound against the Euro, we have seen a similar improvement in estimates for the European Union, where GDP growth expectations have been revised up to 1.6% for 2017 and 1.8% for 2018. The reality is that all this happens because there was already a very independent framework in the UK and a dynamic economic environment that makes risk much lower, but we cannot forget that there is a risk.

The fact that these concerns and doom expectations have not yet manifested does not mean that risks do not exist, especially in the face of a tense, long, and hard negotiation in which both sides have very different positions. If the European Union is smart, it would use Brexit as an opportunity to strengthen as an area of freedom, flexibility, attractive investment opportunities and global trade.
Exports and imports The 0.4% decreased in UK production experienced in the first months of 2017, was due to a decrease in the pharmaceutical sector of 0.9% mostly caused by the uncertainty about the Trump healthcare plan, not by Brexit.

The UK trade deficit fell to 4.7 billion pounds in the three months leading to January 2017. Exports grew at the fastest pace in ten years in the quarter, reaching a record high, and imports also skyrocketed. Therefore, it is safe to say that the impact on trade that many predicted is nowhere to be seen at the moment. The UK is one of the biggest trading partners of the EU, and it will continue to be.

Contributions
The United Kingdom is the second largest net contributor, after Germany, to the EU budget. That cost will have to be distributed among the other member States. Spain for example, will have to pay around 1 billion Euros more per year.

Immigration
An extremely important topic. Net immigration from Europe to the UK has more than doubled since 2012 -according to a report by Capital Economics-, reaching 185,000 people. Total net immigration has also shot up, reaching more than 320,000 people, compared with a historical average of 150,000 people, according to the British government.

The free movement of citizens and the rights of EU workers in the United Kingdom and those of the British in the rest of Europe will likely be the ace card used to accelerate negotiations. The UK does not want to outsource its immigration policy to the European Union, as it does not have a clear one or exercise leadership in the face of geopolitical challenges. Be that as it may, the days of the free movement of workers are over, and a policy similar to that of the United States could be expected.

Trade
Nearly half of UK exports go to the EU, but of the 28 countries, 26 have huge trade surpluses with the United Kingdom. What does that mean? The EU, country by country, exports more to Britain than it imports. That is important, especially with the country that has the largest surplus with the UK, Germany.

The UK has a high deficit in trade in goods, but a huge surplus in services. All this means that the exit from the single market can have an impact, but that the solution for each other depends on a fast and specific agreement for the United Kingdom.

Financial sector
With the latest data available, the UK exports 19.4 billion pounds per year in financial services to the EU, a surplus close to 0.9% of GDP. This is a big stumbling block. It is not clear if financial institutions will have a passport to operate with the EU or if the financial sector will face limitations. The United Kingdom originates almost 20% of loans for EU infrastructure projects, according to the City report.

Regulation

According to Capital Economics and Open Europe, the cost to the UK of the 100 most expensive rules and regulations of the European Union is 33 billion pounds a year. Excessive bureaucracy and high taxes have limited potential growth and investment in Europe, particularly in the past eight years.

If the European Union does not take the initiative and begins to dismantle the bureaucratic ‘leviathan’ it has built, this cost will be a problem for many countries. However, we must not miss out on the fact that the UK is already one of the leading countries in ease of doing business. Therefore, eliminating unnecessary regulation and bureaucracy is one of the aces up the sleeve of the UK to attract investment post-Brexit.

Foreign investment
The European Union accounts for almost 46% of foreign investment in the United Kingdom; mainly due to the purchases by multinational companies of other British companies. This flow is not expected to be reduced and, of course, could be easily replaced. European investment has already reduced in recent years and has been more than offset by other countries.

The Opportunity for Madrid

Brexit presents many challenges and opportunities, for Spain as a country and particularly for the Region of Madrid, so that it keeps being a driving force for job creation and to attract investment. These are two distinctive qualities of the Madrid Regional Community.

For those businesses and services that want to remain partly or fully located within the EU, a region like Madrid offers an excellent opportunity for growth and diversification. This is a region fully committed to the European Union project, leader in economic freedom and as a business facilitator, which offers a unique combination of quality services and competitive costs.

The Community of Madrid is not just ready for this opportunity, but it is actually waiting for it with enormous commitment and enthusiasm. Madrid offers a competitive taxation and labour legislation that promotes business growth and employment, top quality infrastructure, a gateway into Europe and Latin America, competitive talent, quality of life and excellent public services. With more than 1.7 million square metres of available first class office space in the centre of Madrid, which ranks 2 in the Savills list of available prime real estate.

UK investment into the EU will not likely be reduced due to Brexit. If anything, it will increase, given the opportunity to develop activities within the EU and move part of some businesses abroad.

We are approaching a period of maximum uncertainty, but the opportunity is enormous. The European Union can come out of these negotiations strengthened, reducing bureaucracy and attracting investment and capital.
I believe Brexit is not going to be a zero-sum game. The challenges presented are only opportunities. If the EU takes them, there is a strong chance to grow, become more prosperous, and regain leadership.
The European Union can become a world leader in trade, growth, employment and investment attraction, with or without the UK in it. The opportunity is enormous, and we should make the most of it.
Daniel Lacalle, Commissioner of the Madrid Region in London, has a PhD in Economics, and is the author of Life In The Financial Markets, The Energy World Is Flat (Wiley) and Escape from the Central Bank Trap (BEP).

Video: France. Reforms Could Disappoint

Global Economy, Media, On the cover, Sin categoría

The problem of France is to recover the dynamism lost in an economy that Macron himself described as “sclerotic” . There are many doubts about his true reformist agenda, evidenced by his actions when he has been minister. But we have to give him the benefit of the doubt. He faces a radicalized parliament, with traditional parties in disarray.

Reducing corporate tax, cutting labor costs, carrying out a labor reform similar to the Spanish one, and immigrant integration policies are part of Macron’s proposals, but we must wait to see if he wins the second round and if he has the support to implement them.

The challenge is enormous.

Just fifteen years ago, Germany and France had similar deficits and debts. Germany took the road of reforms and France the “ostrich policy”, ignoring its imbalances, attacking its own waterline with confiscatory tax and spending policies to sustain a hypertrophied public sector.

The last time France had a balanced budget was in 1980, and since 1974 it has never generated a surplus, public debt reached 96% of GDP, the economy has been stagnating for two decades, unemployment stands at 10% (with 23.6% youth unemployment ) and in 2017 it still has a current account deficit of 6.5 billion euros while the Eurozone has a surplus. Germany, on the other side, has a budget surplus, growth, much less unemployment (3.9%) and lower debt (71%). The French candidates have blamed the country’s problems on external enemies, from ‘globalization’ to ‘the euro’, however, comparisons with Germany destroy those arguments. It is hilarious to listen to LePen or Melenchon, the Ying and Yang of extremism, blaming France’s problems on “budget cuts” or “austerity . “

In a country where public spending exceeds 57% of GDP, where public administration spending has grown by more than 13% since 2008 and 22% of the active population works for the State, local governments and public entities, talking of austerity is a bad joke. In addition, France has spent tens of billions on ‘stimulus plans’ since 2009 . Specifically, 47 billion euro in 2009, 1.24 billion to the automotive industry and two ‘growth plans’ under the Hollande mandate: 37.6 billion euro (‘investments’) and 16.5 billion (‘technology’).

Blaming the French stagnation on “neoliberalism”, “austerity” or “the euro” is like an obese person blaming his overweight on lack of more donuts.

The problem is economic “dirigisme” -interventionism-, which stifles the potential of a rich nation that should not be satisfied with having better economic data than the periphery of Europe. France should be compared to the world’s leading economies. The problem that the next president of France faces is that, repeating the mistakes of the past, the country will not regain the dynamism of a nation that should not be content with secular stagnation and perpetuating imbalances.

Unfortunately, the results of the past elections have shown us that a large part of the electorate thinks that “dirigiste” socialism has not worked because the country needs a lot more of it. A large part of the electorate prefers to believe that two plus two add up to twenty-two and that they will be richer if they take more money from those who produce to give it to those who do not.

Legitimising the populist message is not the way to combat radicalism. It fuels populism.

Daniel Lacalle is a PhD in Economics, fund manager and author of Escape from the Central Bank Trap (BEP), Life In The Financial Markets, and The Energy World Is Flat (Wiley).

Video and Images courtesy CNBC

 

Video: Expectations of Second Quarter Growth Positive

Global Economy, Interviews, Media, On the cover, Sin categoría

In this video, we comment on the prospect of growth and inflation in developed markets. While inflation expectations were too aggressive at the beginning of the year, I remain positive on US growth and EU.

 

Daniel Lacalle is Chief Economist at Tressis, PhD in Economics, Fund Manager at Adriza International  Opportunities and author of “Escape from the Central Bank Trap”, “Life In The Financial Markets” and “The Energy World Is Flat”.

Unsustainable? Welfare, Taxation and Bureaucracy

Global Economy, On the cover, Sin categoría

Angela Merkel used to say that “the European Union is c5% of the world’s population, c25% of its GDP and c50% of global welfare spending”:

The real data is more concerning.

The European Union is:

7.2% of the World Population.
23.8% of the World’s GDP.
58% of the World’s Welfare Spending.

Something has to give.

The EU average tax burden on workers is 44.9%. The average worker in the EU spends half a year working for the tax man.

Taxation accounts for 41% of the euro area GDP.

Ease of doing business remains below the leading economies of the world.

Bureaucracy is asphyxiating. The EU approves on average 80 directives, 1200 regulations and 700 decisions per year.

The main EU economies remain significantly below the leaders in economic freedom.

At the same time, despite massive tax burden and constant confiscation of wealth, the EU’s average debt to GDP is 90%. Continuously making science fiction estimates of tax evasion and calling to tax the rich as a mirage, has led to unsustainable levels of government burden on the real economy and hinders investment and capital investment as policies are increasingly aimed at taxing the productive to subsidize the unproductive.

Using unrealistic estimates of tax revenues made by politicians -that are always missed- for very real expenditures -which are consistently above budget- has made the EU miss its debt reduction expectations.

The cost of hiper-regulation and excessive taxes to job creation, investment and innovation are evident. The EU has an unemployment rate that almost doubles the leading economic peers, and taxation hinders the growth of SMEs (small and medium enterprises), which shows a ratio of development to large companies that is half the same ratio in the US.

The EU has many positive things, as I explained here. But we cannot let bureaucracy and confiscatory taxation to take over a worthy project. Because ignoring those risks, we would make the EU implode.

Unless the EU politicians change their mindset of a model built on massive taxation and bureaucracy and start putting at the forefront of policy cutting taxes, slashing red tape, more open business, more economic freedom, focusing on job creation and attraction of capital, the welfare state will implode.

The EU’s welfare state can only be protected defending growth, investment, and job creation. However, it will likely be destroyed by the same ones that say they defend “the public sector”. By making it unsustainable.

Daniel Lacalle is Chief Economist at Tressis SV, has a PhD in Economics and is author of “Escape from the Central Bank Trap”, “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)

Images courtesy Lisa, 2012 at Washington Post Writers Group

(Data Eurostat, World Bank, Daily Telegraph)